APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HOTEL INDUSTRY REPORT

Regal

Regal Hongkong Hotel (“RHK”) is located in one of Hong Kong’s most popular tourism and retail destinations and benefits from extensive transport links with the rest of the territory. Nearby HKCEC is Hong Kong’s landmark conference and exhibition center and attracts large number of international visitors to its trade fairs each year. The 40,000-seat Hong Kong Stadium and Victoria Park are also within a 10 minute walk of RHK.

Location

RHK is located in , one of the busiest commercial, shopping and entertainment districts in Hong Kong.

The Property

RHK, a 33-story building (plus four basement floors) opened in 1993, has a total gross floor area of approximately 215,736 sq.ft. RHK comprises 424 guest rooms, 3 restaurants, 1 bar, 1 lounge, 1 cake shop, 1 ballroom of approximately 2,300 sq.ft. and 10 meeting rooms. It also provides a range of recreational facilities including a swimming pool and a health club.

RHK is classified as a High Tariff A Hotel by the HKTB.

RHK has only a few harbor view rooms, limiting its ability to charge high rates. Nevertheless, RHK is well-known for its high standard of decoration and its spacious guestrooms.

RHK is a medium size hotel, hindering its ability to accommodate large convention/conference groups. Nevertheless, the range of facilities provided by RHK is ample compared with similar hotels in the district. Outdoor swimming pools, for example, are not available at The Park Lane Hong Kong or Hotel Hong Kong also located in Causeway Bay.

Asset Enhancement Works

The enhancement works, after completion in Q3/2007, will provide 50 new super-deluxe guest rooms on top of the existing hotel. 2 additional stories will be added to the building and RHK’s total gross floor area will increase to approximately 269,911 sq.ft. Renovation work carried out recently at the RHK has included renovation of the coffee shop and Chinese restaurant.

To avoid excessive noise generated during construction, main structural elements like columns and beams will be made of steel. Concrete floor slabs will be prefabricated off-site. Noisy works such as in-situ concreting, formwork fabrication and steel bending are therefore avoided. The western restaurant on 31/F will be vacated during the construction period, together with the mechanical floor on 30/F; and this will act as a noise buffer to the guestrooms below. The noisy interior carpentry works will be kept to a minimum by off-site prefabrication. Construction materials delivery will be by tower crane erected on the rooftop. The vertical movement of workers will be restricted to fire exit staircases so as to avoid any disturbance to the hotel’s normal operations.

The higher room rates expected from these new deluxe rooms will lead to higher overall average room rates for RHK.

— 501 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

Transportation and Vicinity

Located in Causeway Bay, RHK is well served by various modes of transport, including MTR, buses, mini buses and trams.

The MTR is just 3 minutes walk from RHK. All major business districts in Hong Kong, including Central, Wanchai, and , are within 10 minutes by MTR and the Airport is around 38 minutes61 travel time, also by MTR.

Causeway Bay is also connected to other areas of Hong Kong by its extensive road network. The area is linked to via the Cross-Harbour Tunnel and to the western part of via Gloucester Road and the eastern region via the Eastern Corridor.

Two major infrastructure projects are expected to improve the overall accessibility of the Causeway Bay area, namely, the Shatin to Central Link and the Central — Wanchai Bypass. Nevertheless, these projects are long term and will not be completed before 2010.

RHK is close to a variety of developments and facilities, including shopping/entertainment developments such as , Lee Garden, Lee Theatre and SOGO Department Store, business facilities such as Hong Kong Convention and Exhibition Centre (“HKCEC”), and recreational facilities such as Victoria Park, the Hong Kong Stadium and the Happy Valley Race Course.

HKCEC is regarded as one of the most efficient and functional meeting and exhibition centers in the region comprising around 700,000 sq.ft. of exhibition and meeting space. Each year, HKCEC hosts more than 45 international trade fairs including the world’s largest leather fair and watch and clock fair. The regular international fairs for giftware, toys, fashion, jewelry, electronics and optical products are Asia’s largest. The exhibitions and fairs generate strong demand for hotels in the Wanchai/Causeway Bay area.

In view of the growing M.I.C.E. market, the Trade Development Council proposes to extend HKCEC by adding approximately 200,000 sq.ft. of additional convention and exhibition space. With a scheduled completion in 2009, the larger center is expected to draw more business travelers to Hong Kong.

The 40,000-seat Hong Kong Stadium is the largest outdoor multi-purpose entertainment and sports venue in Hong Kong. Located within a 10-minute walk of RHK, the Stadium hosts a number of high profile international events such as the Rugby Sevens and the Lunar New Year soccer tournament.

Victoria Park is within a 5-minute walk of RHK and has a site area of over 17 hectares. The Park has been chosen as the venue for a number of international tennis tournaments including the Champions Challenge and the Davis Cup.

The easy accessibility of RHK and its proximity to major retail, exhibition and recreational facilities in Hong Kong helps diversify RHK’s guest profile to capture leisure travelers, businessmen, trade show/exhibition participants and organizers and sports groups.

61 Source: MTRC

— 502 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

The Pedestrian Plan for Causeway Bay includes the 24-hour pedestrianization of Kai Chiu Road, the construction of an underground pedestrian-cum-retail link across Hennessy Road, and the provision of public transport interchanges. Although detailed development schedules have not yet been drawn up, once completed, these schemes should enhance the overall accessibility of Causeway Bay and further strengthen its role as a major retail/entertainment center in Hong Kong.

Complementing facilities are also in the pipeline within the neighborhood. Hysan Development Limited’s plans to redevelop its Hennessy Centre into an office and retail complex, which will comprise approximately 700,000 sq.ft. of commercial space with a heavy retail element, to be completed in late 2009 or early 2010.

Competition

According to the HKTB, there were twenty hotels located in the Wanchai/Causeway Bay area, comprising approximately 8,400 rooms, or 18% of the territory total in 2005.

Hotel Stock Distribution by Year of Completion in Wanchai/Causeway Bay, 1970-2006

2000-2006 24% 1970-1979 22%

1990-1999 27% 1980-1989 27%

Source: HKTB, Savills Research & Consultancy

Hotel completions have occurred consistently throughout the past three decades with 20% to 30% of stock completed in each decade (70s, 80s and 90s). Significant hotel supply during the period includes The Excelsior (883 rooms, 1972), The Park Lane (803 rooms, 1973), Grand Hyatt (556 rooms, 1988), Renaissance Harbour View Hotel (860 rooms, 1988), Novotel Century Hong Kong (511 rooms, 1991) and Regal Hongkong Hotel (424 rooms, 1993). Over the past 7 years with 9 hotels have been completed (1,997 rooms in total), five of them (1,334 rooms) were completed in 2005 alone.

There are two scheduled hotel developments in Wanchai/Causeway Bay, the 366 hotel project and the 6-20 Leighton Road hotel project, for completion in 2007 and 2008 respectively. This may provide competition to RHK although their operators and grades are yet to be made public.

— 503 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

Besides new hotel development, only two projects where the use of existing properties will be changed to hotels in the Wanchai/Causeway Bay area are scheduled over the next five years.

Proposed Hotel Developments in Wanchai/Causeway Bay

Development No. of Rooms Expected Completion Rison Hotel (Change of existing property) 82 2007 366 Lockhart Road (New hotel) 36 2007 17-21 Fenwick Street and 52-58 (Change of existing property) 96 2008 6 — 20 Leighton Road (New hotel) 206 2008 Total 420

Source: HKTB, Savills Research & Consultancy

Performance

Average Occupancy Rates of RHK, High Tariff A Hotels and Wanchai/ Causeway Bay Hotels, 2001-2005

Regal Hongkong Hotel High Tariff A Wanchai/Causeway Bay % 100

90

80

70

60

50

40

30

20

10

0 2001 2002 2003 2004 2005

Source: Regal Hotels International Ltd., HKTB, Savills Research & Consultancy

— 504 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

RHK has performed well compared with the High Tariff A market and the Wanchai/Causeway Bay hotel market in general over the past 2 years with its occupancy rate surpassing 90% in 2004. A slight decline in both RHK and the district occupancy was recorded over 2005, following the overall market trend.

Average Room Rates of RHK and High Tariff A Hotels, 1997-2005

Regal Hongkong Hotel High Tariff A HK$ 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Regal Hotels International Ltd., Mandarin Oriental Hotel Group, HKTB, Savills Research & Consultancy

RHK recorded 16% growth in average room rates in 2004, similar to High Tariff A market growth. RHK’s rates continued to increase by nearly 20% in 2005, again keeping pace with the market.

Despite outperforming the market over the past 2 years in occupancy terms, the growth of room rates has lagged the overall market, reflecting the management’s strategy to drive RevPAR by occupancy over the period. At the end of 2005, the average room rate of High Tariff A Hotels was only 8% below the 1997 peak, whereas RHK’s room rate was still 39% behind its 1997 peak. These findings suggest that RHK’s room rates have room to increase.

The revenue distribution of RHK was broadly in line with the market average, with around 55% generated from room charges and 40% from F&B sales. The proportion of room revenue increased to 57% in 2005, and is expected to increase to over 60% by the end of 2007 when the 50 additional deluxe rooms are in full operation.

— 505 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

According to Regal Hotels International Ltd., RHK has established solid business relationships with a number of multinational companies which form a sound base of high-yielding frequent individual business travelers. Business travelers accounted for 37% of RHK’s business in 2005.

RevPAR of RHK and High Tariff A Hotels, 1997 to 2005

Regal Hongkong Hotel High Tariff A HK$ 1,600

1,400

1,200

1,000

800

600

400

200

0 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: HKTB, Regal Hotels International Ltd., Savills Research & Consultancy

The movement of RHK’s RevPAR has generally tracked the High Tariff A hotel average. RevPAR was severely dampened by the Asian Financial Crisis (1997-8) and SARS (2003) but reacted strongly to favorable market conditions such as the I.T. boom (2000), the post SARS recovery and the implementation of IVS (2003). Despite the volatility, the average annual growth rate of the RevPAR of RHK and the High Tariff A hotel average between 1997 and 2005 were almost identical at approximately 4% per annum. It is noteworthy that in 2005, since occupancy rates were at high levels, operators have been more aggressive in raising room rates and RHK was no exception. RevPAR in 2005 was therefore driven largely by room rate rises. As RHK’s occupancy rate has been high at approximately 90% over 2004 and 2005, we expect the RevPAR of RHK to continue to be largely driven by room rate rises.

The average room rate of RHK over 2006 increased by 13% compared with the same period in 2005 while the average occupancy rate remained at 90%, same as the same period last year. RevPAR over this period increased by approximately 13%.

Outlook

Looking ahead, the addition of 50 deluxe guest rooms will serve to expand the scale of RHK and more importantly, help to attract more high spending guests. This expansion should coincide with reviving visitor numbers from the Americas, Europe and Australasia (10%-20% growth over 2005), who traditionally spend more on hotel bills (35%-45% of total spending in 2005).

— 506 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

The expansion of exhibition space at HKCEC by 2009, together with the anticipated growth of the M.I.C.E. market in Hong Kong, should help attract more business travelers to the Wanchai/ Causeway Bay area, thus benefiting RHK.

Future supply levels may represent a threat to RHK as 420 new rooms over the next five years will increase hotel room stock (8,393 rooms in 2006) by 5% in Wanchai/Causeway Bay, though the grading of these new hotels are largely unknown. Further competition to RHK is limited as there is very limited land available for hotel development in Causeway Bay over the next 4 years.

The occupancy rate of RHK is expected to remain at high levels between 90% and 91% per annum between 2007 and 2010 while the completion of the HKCEC extension in 2009 are expected to push RHK’s occupancy rates up.

Average Occupancy Rate Projections, 2007E to 2010E

High Tariff A Hotels RHK Events Related to RHK 2007-2010 86% — 87% per annum 90% — 91% per annum Completion of extension works in Q2/2007, Completion of extension of HKCEC

Source: Savills Research & Consultancy

The movements in average room rates at RHK followed the High Tariff A market in the up cycle over 2004 to 2006. Assuming this trend continues to hold, together with the completion of RHK’s extension work, the average room rate of RHK is projected to grow in the order of 8% to 15% in 2007, slightly above market average. Above market growth may also be recorded from 2009 onwards with the completion of the HKCEC extension.

Average Room Rate Projections, 2007E to 2010E

High Tariff A Hotels RHK Events Related to RHK 2007 +8% — 10% +8% — 15% Completion of extension works in Q2/2007 2008-2010 +6% — 8% per annum +6% — 9% per annum Completion of extension of HKCEC

Source: Savills Research & Consultancy

RevPAR of RHK is expected to rise in line with the High Tariff A market in the order of approximately 10% per annum from 2006 to 2010. Besides the generally positive outlook for the hotel industry and a rising trend in business travel, the extension works, which will enhance the profile and capacity of RHK, and the HKCEC extension, which will broaden the high yielding business guest base, will support this growth.

— 507 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

Regal Kowloon Hotel

Regal Kowloon Hotel (“RKH”) offers access to Hong Kong’s extensive rail network via KCR East , a 5-minute walk away. The proximity of Tsim Sha Tsui as a well established retail, entertainment and commercial center is a significant factor in the attractiveness of the hotel. New developments and scheduled improvements in urban design will ensure the future popularity of the area. Recently completed renovation works are also expected to enhance the appeal of RKH.

Location

RKH is located in Tsim Sha Tsui East, a sub-district of the busy Tsim Sha Tsui district, where accessibility has improved significantly over recent years.

The Property

RKH, a 16-story building (plus four basement levels) opened in 1982, has a total gross floor area of approximately 341,714 sq.ft. The hotel comprises 600 guest rooms, 5 restaurants (2 restaurants are operated by a third party), 1 bar, 1 lounge, 1 cake shop, 1 ballroom of approximately 3,500 sq.ft. and 12 meeting rooms. It also provides a range of recreational facilities including a fitness center, a sauna (operated by a third party), 2 karaoke clubs (operated by a third party) and a shopping arcade of approximately 52,000 sq.ft.

RKH is classified as a High Tariff A Hotel by the HKTB.

RKH is the only hotel in Tsim Sha Tsui East with a full view of “Centenary Garden”. Rooms available at RKH are comparatively larger than other hotels of the same class.

Renovation Works

RKH has spent more than HK$15 million to renovate its lobby area, driveway, shop areas, F&B outlets, banquet hall and function rooms between 2003 and 2005. The improved facilities suggest that RKH has the potential to revise room rates upward.

Transportation and Vicinity

Tsim Sha Tsui has developed as a transportation hub. Passengers travelling from Tsim Sha Tsui to other parts of Hong Kong are given a wide range of options, including bus, road and rail links via the Kowloon-Canton Railway (“KCR”) East Rail and MTR.

As shown in the map below, Tsim Sha Tsui is situated at the intersection of the KCR East Rail and MTR Tsuen Wan Line. The recently opened KCR East Tsim Sha Tsui Station (a 5-minute walk from RKH) means that an extensive rail network with access to all major business areas including Central, Causeway Bay and Mongkok, as well as all major industrial areas including , Kwun Tong, Cheung Sha Wan and Kwai Chung is located in the neighborhood of RKH.

— 508 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

Existing Rail Network

Source: Highways Department, Savills Research & Consultancy

The Kowloon Southern Link when complete in 2009/10 will connect KCR East Tsim Sha Tsui Station with West Rail. This will render Tsim Sha Tsui more easily accessible for people living in the western .

Cross boundary ferry services to Mainland China are available at the China Ferry Terminal in . The Hung Hom Cross-Harbour Tunnel, the Western Harbour Crossing and the all link Tsim Sha Tsui to Hong Kong Island.

A proposal by the Economic Development and Labour Bureau has suggested that the existing public transport interchange (“PTI”) at the Tsim Sha Tsui Star Ferry Pier be developed into an open plaza and a new PTI be constructed in Wing On Plaza Garden in Tsim Sha Tsui East, a 5-minute walk from RKH, as a replacement. This plan, although not confirmed, would further enhance the accessibility of Tsim Sha Tsui East on completion.

Tsim Sha Tsui is well established as a major tourist destination and an important cultural hub in the territory. Historic buildings, museums and unique attractions including Avenue of Stars and Star Ferry have made the district attractive to tourists.

— 509 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

Tsim Sha Tsui is one of the most important retail/entertainment areas of Hong Kong with many modern shopping malls (, ), high street shops (along Canton Road and ) and top-quality restaurants and cinemas, attracting both locals and overseas tourists.

Future retail developments including the former Marine Police Headquarters Redevelopment (approximately 78,000 sq.ft., anticipated in 2007), the Hanoi Road Redevelopment (approximately 340,000 sq.ft., anticipated in 2007), Tung Ying Building Redevelopment (approximately 400,000 sq.ft., anticipated in 2009) and Hyatt Regency Hotel Redevelopment (approximately 580,000 sq.ft., anticipated in 2009) are expected to enhance Tsim Sha Tsui’s image as a retail destination.

Tsim Sha Tsui is also a key commercial district where many Grade ‘A’ offices are located. Office tenants in Tsim Sha Tsui are mainly from the trading and manufacturing sectors. Foreign buyers or business associates of these companies represent a strong demand group for hotel rooms in the district, particularly during major trade fairs.

In the longer term, other projects being planned including the mega comprehensive cultural/residential/commercial development of the Cultural District and various pedestrian plans such as urban design and streetscape enhancements on and footpath widening on , are expected to enhance the tourism profile of Tsim Sha Tsui.

Competition

The total stock of hotel rooms in Tsim Sha Tsui stands at approximately 12,500. Over half of the hotels were completed between 1980 and 1989, and around 20% between 1970 and 1979. Around 23% of the total number of hotel rooms in Tsim Sha Tsui are located in Tsim Sha Tsui East. Since The Empire Hotel Kowloon was completed in 2001, there has been no new hotel supply in Tsim Sha Tsui.

Tsim Sha Tsui Hotel Stock Distribution by Year of Completion, 1970-2006

1990-1999 11.2% 2000-2005 2.6%

1980-1989 Pre 1970 54.1% 12.1%

1970-1979 20.0%

Source: HKTB, Savills Research & Consultancy

— 510 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

A number of hotels including Royal Garden Hotel, InterContinental Grand Stanford, Hotel Nikko Hong Kong and Kowloon Shangri-La Hotel Hong Kong are located in the immediate neighborhood of RKH. This agglomeration of well-known hotels strengthens the area’s image as a hospitality node but at the same time creates competition.

RKH has upgraded its facilities to enhance its competitiveness over 2003 to 2005.

5 hotel projects comprising 1,314 rooms are expected to be completed between 2007 and 2010 in Tsim Sha Tsui.

Projects No. of Hotel Rooms Completion 324 2007 Hanoi Road Redevelopment 386 2007 21-23A Prat Avenue 112 2007 W Hotel at Kowloon Station 392 2008 Austin Hotel 100 2010 Total 1,314

Source: HKTB, Savills Research & Consultancy

The closure of Hyatt Regency at the end of 2005 lowered the stock of Tsim Sha Tsui hotel rooms by 723.

There are two hotels providing a total of 3,642 rooms in Hunghom, one was completed in 2006 and the other one is scheduled to be completed in 2007, both are classified as hotels by the HKTB but are marketed as serviced apartments by the operator. Although Hunghom is close to Tsim Sha Tsui East (approximately a 5-minute drive), the district is not regarded as a traditional tourist/commercial area and hence, the two hotels are expected to attract lower budget travellers, representing limited direct competition to RKH.

Performance

Average Occupancy Rates of RKH and Comparable Hotels, 1997-2005

High Tariff A Regal Kowloon Hotel % Kowloon Shangri-La Average of Tsim Sha Tsui Hotels 100

80

60

40

20

0 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: HKTB, Regal Hotels International Ltd., HK & Shanghai Hotel, Shangri-La Asia, Savills Research & Consultancy

— 511 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT

RKH occupancy rates were below High Tariff A market rates between 1999 and 2003. We reason that this underperformance was because of the aging hotel facilities. Nevertheless, the recently completed renovation works should improve RKH’s performance.

In 2004 and 2005, RKH occupancy rates rose to market levels of around 84%, but remained below the Tsim Sha Tsui district average of 87%. Nevertheless, the occupancy rate of RKH was higher than the Kowloon Shangri-La by 13 percentage points in 2004. Kowloon Shangri-La was chosen as a benchmark because of its proximity to RKH and its availability of public information, although its room rates and RevPAR were higher than RKH.

Average Room Rates of RKH and Comparable Hotels, 1997-2005

High Tariff A Regal Kowloon Hotel Kowloon Shangri-La

HK$ 2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: HKTB, Regal Hotels International Ltd., HK & Shanghai Hotel, Shangri-La Asia, Savills Research & Consultancy

The higher occupancy rates of RKH were partly because of a competitive room rate which was well below the market average and other comparable hotels. Nevertheless, RKH achieved a similar growth rate (17.3%) to the High Tariff A market (18.8%) in 2005.

At the end of 2005, the average room rate of High Tariff A Hotels was only 8% below the 1997 peak, whereas RHK’s room rate was still 39% behind its 1997 peak. This finding suggests that room rates of RHK have room to increase.

The proportion of High Tariff A revenue from rooms, F&B and other services in 2004 stood at 52.2%, 42.1% and 5.7% respectively. Compared with RKH revenues in 2004, room sales were the most important income source (67.6%), followed by food & beverage (27.1%). The smaller F&B revenue contribution to RKH revenues compared with the High Tariff A market can be attributed to its older F&B facilities. Nevertheless, following the recent renovation of the restaurants and banquet facilities, we expect an increase in the F&B contribution in the future.

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